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Tony Wickenden: Helping sole traders prepare for the worst

Advisers have a crucial role in helping sole traders provide against any loss caused by their death or critical illness

Bridging the gap between what a client would like to happen and what will happen with regards to anything financial is a key part of an adviser’s role. This involves intelligent questioning that probes to determine what the expected outcome would be if a certain event were to happen.

Where the client runs their own business, there are some vital potential risks to raise awareness of.

Indeed, it is the adviser’s responsibility to ensure that they are at least informed of the consequences of not considering these risks.

For instance, critical illness for a sole trader could have serious financial consequences for both them and their family/dependants; death even more so.

Many would consider sole trader cover to be outside the definition of business assurance and, of course, those solutions that do ignore this demographic will be ineffective.

But the sole trader market is growing rapidly and demands to be carefully considered. So what are the options?

If we take a typical sole trader with no employees, the cover required is essentially personal, providing benefit for those that will suffer as a result of the event in question.

When it comes to critical illness, not being an employee means there will be no employer scheme that covers this risk. Reliance on state support for most would be a big mistake, and so protection will be the sole trader’s responsibility.

The key to communicating this risk to such clients is to first create justifiable anxiety.

Pictures need to be painted. Shortfalls and the financial consequences of inaction have to be appreciated.

What your client would want to happen in this case would be for them and their family to have no financial stress to deal with. What will happen if no action is taken will fall far short of that hope.

The answer? Appropriate cover to pay out on sickness and inability to work.

Yes, it will be personal cover, and there will be no tax deductibility for the premiums.

Paper familyBut the corollary is that the benefits will not be taxable. Essentially, it is personal permanent health insurance.

A lump-sum payment could be generated through a stand-alone critical illness policy or under one that also pays out on death. Where the critical illness benefit is provided under a combined policy, it should not be a problem to employ a trust that carves out the benefit for the life assured, but also provides that any death benefit is payable to the beneficiaries without infringing the (dreaded) reservation of benefit provisions.

To achieve this, the policy must provide that, if the critical illness benefit is paid, the death benefit must be completely expunged or remain unreduced at the level it was before the critical illness was diagnosed. That is also true for cover provided on death.

So, a simple personal life assurance policy in trust for discretionary or specified beneficiaries.

Is it possible for sole traders to secure the same tax outcomes as directors of companies?

Yes, if they trade through a company. Even highly tax-effective relevant life policies could be considered for death benefit cover.

As a separate issue, of course, any sole trader operating through a limited company must consider the dreaded IR35 rules, together with the new provisions that shift the burden of determining employment status to the buyer of their services.

Tony Wickenden is joint managing director of Technical Connection (a St James’s Place Wealth Management group company). You can find him Tweeting @tecconn

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